IMF’s Blanchard: Global Economy Gripped by Meta-Uncertainty

The International Monetary Fund downgraded its global economic outlook Monday and warned of more trouble ahead unless policymakers around the world ramp up action. In an interview with The Wall Street Journal, IMF chief economist Olivier Blanchard said higher uncertainty is weighing on growth around the world. He also said European nations need to step up quickly to ease borrowing costs for struggling nations such as Spain and Italy. Here are excerpts:

–On the pervasive global slowdown:

People feel the world has darkened a lot. The trend is a bit worse than the forecast suggests. The bigger story is that we still have a weak world recovery.

There is clearly increased uncertainty. The fact that this downside risk is not the tail risk anymore … is increasing uncertainty. I was talking to somebody who is on the board of a number of large companies. They’re all sitting on the cash and not spending. I asked him and he said, ‘Well, it’s uncertainty.’ But what exactly is it? It’s nearly meta-uncertainty. It’s a world they cannot quite think about. These were decisions in the U.S., where so far the direct effects from Europe haven’t been very substantial. So I think the world’s higher uncertainty is clearly a factor.

–On the significant declines in trade:

In 2008-09, there was a collapse of global trade. We were all very surprised. Output was not doing well, but the collapse in global trade was enormous. We realized at the time that the elasticity of trade with respect to global output was not 1, as you might think, but more like 3 to 4. So this explained it. And then it recovered like crazy.